A French commercial lease (bail commercial) is renewed, but the landlord is slow to propose a new rent, which becomes payable only nearly fifteen months after the lease took effect. At the three-yearly rent review (révision triennale), which index applies: the one at the effective date, or the one at the date the rent became payable? In a reported decision of 8 September 2016, the Third Civil Chamber of the Cour de cassation (French supreme court for civil and commercial matters) chose the effective date of the renewed lease and set aside the so-called distortion rule of the Monetary and Financial Code (code monétaire et financier), which bars a clause from measuring the index variation over a period longer than the interval between two reviews. For the valuer, this fixes the denominator of the calculation.
The facts
A company rented premises for commercial use owned by an SCI (société civile immobilière, a French property-holding company). It requested the renewal of its lease; as the parties could not agree on the rent, the commercial rent judge (juge des loyers commerciaux) was seised. A ruling of 5 February 2013 held that the lease had been renewed from 1 April 2007, at an uncapped rent (loyer déplafonné) applicable from 23 June 2008. During the proceedings, the landlord SCI applied for the three-yearly review of the rent.
The Versailles Court of Appeal, on 3 March 2015, took as base index that of the second quarter of 2007. The tenant appealed: in its view, the variation of the index had to be measured from the last court fixing of the rent, which had taken effect only on 23 June 2008. It also criticised the Court of Appeal for not answering its argument based on the distortion rule, laid down in article L. 112-1 of the Monetary and Financial Code. Lastly, it argued that, by using the indices of the second quarter of 2007 and the fourth quarter of 2010, the Court of Appeal had used a period of variation longer than the one elapsed since 23 June 2008.
The decision
The Cour de cassation dismissed the appeal (Cass. 3e civ., 8 September 2016, appeal no. 15-17.485, reported).
It approved the Court of Appeal for having “correctly held that the starting point of the three-year period provided for by article L. 145-38 of the Commercial Code lies at the date of renewal of the lease and that, although the date on which the renewed rent became payable had been deferred to 23 June 2008, owing to the landlord’s delay in proposing a new rent, that circumstance had no bearing on the date on which the new lease took effect, set at 1 April 2007” (translated from the French).
It then held that the Court of Appeal “rightly deduced from this, without being required to answer an ineffective argument based on article L. 112-1 of the Monetary and Financial Code, which is inapplicable to the statutory three-yearly review, that the index to be used for calculating the reviewed rent was that of the second quarter of 2007”.
The decision sets no rent amount and says nothing about the rental value or the exception based on a material change in local commercial factors (facteurs locaux de commercialité). The review under article L. 145-39, opened by a variation of more than a quarter in the indexed rent, is the subject of another 2016 decision: the reference rent for the quarter-variation review after renewal.
What this changes for valuation
The timetable runs from the effective date of the renewed lease. Article L. 145-38 of the Commercial Code opens the review at least three years after the starting point of the renewed lease. The decision places that starting point at the date the new lease took effect, here 1 April 2007, not at the rent’s payment date. The deferral of the payment date has no bearing on that date. Under a tacit extension, the effective date is itself computed from the request or the notice, as shown in the article on the lease renewed twelve years and one day after its start.
The cap is calculated from the index at the effective date. Unless a material change in local commercial factors has caused, by itself, a variation of more than 10% in rental value, the variation of the reviewed rent cannot exceed that of the index since the last amicable or court fixing of the rent (article L. 145-38): the construction cost index at the time of the facts, the commercial rents index (indice des loyers commerciaux) or the office and service activities rents index since the Law of 18 June 2014. The cap is the rent of the renewed lease, multiplied by the index used at the date of the application and divided by the base index; the reviewed rent is the rental value within that limit. The decision places this denominator in the quarter of the effective date.
An example of the stakes. With fictitious indices, a renewed rent of €30,000 a year, a base index of 100 and an index of 108 at the date of the application give a cap of €32,400. Starting from 104, the index of a later quarter in which the rent became payable, would bring it down to about €31,150, nearly €1,250 less a year. The effect works both ways, depending on whether the index rose or fell in the meantime. The report states the effective date, the two indices and their sources, then compares the cap with the rental value at the date of the application, the date from which the review takes effect under the same article.
The distortion rule does not govern the statutory review. The Court holds article L. 112-1 of the Monetary and Financial Code “inapplicable to the statutory three-yearly review”: the objection based on a period of variation longer than the time since the rent became payable is rejected. A ruling of 17 May 2018, presented in the article on the indexation clause deemed unwritten, completes the picture: where the effective date of the reviewed rent does not coincide with the annual indexation date, the judge adapts the base index of the indexation clause (clause d’échelle mobile). The statutory calculation first, the clause’s index next. A clause defeating the statutory review is, moreover, deemed unwritten, as the article on the unlimited flat-rate rise recalls.
What the valuer takes from it
- After a renewal, the three-year period of article L. 145-38 runs from the renewed lease’s effective date, not from the rent’s payment date.
- The base index of the three-yearly review is that of this effective date; a payment date deferred by the landlord’s delay in proposing a rent does not move it.
- Article L. 112-1 of the Monetary and Financial Code, inapplicable to the statutory three-yearly review, frames the indexation clause, whose base index is adjusted afterwards (ruling of 17 May 2018).
- The report establishes the effective date retained, the two indices and the cap, then compares them with the rental value at the date of the application.
Further reading
The Commercial rent and leases page describes the assignment, its timescale and its fee. The guide Commercial lease renewal: my landlord wants to uncap the rent and the glossary entries indice des loyers commerciaux, loyer plafonné and valeur locative complement this article. Two other reported decisions of 2016 on rent review have their own commentary: French commercial rent review: the quarter counts from renewal and Emphyteutic long lease: rent review cannot track rental value. On the same theme: Commercial lease: twelve years and one day, the rent is uncapped and Indexation clause unwritten: the refund ignores the indexation. The decision is available on Légifrance.
What next
A three-yearly review to calculate after your commercial lease was renewed?
I establish, from the documents and the position retained by the court or the parties, the effective date of the renewed lease and the base index, then calculate the cap on the three-yearly review and the rental value at the date of the application, for the landlord, the tenant or the court-ordered appraisal.
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